The world isn't ending? Time to buy stocks

On Wall Street, fear is so five minutes ago. Hope is once again in vogue.

With the Dow Jones industrial average’s 228.87-point, 1.8% jump today to 12,849.36, the index gained 4.2% for the week. That trimmed its year-to-date decline to 3.1%.

Check your 401(k) account this weekend. You’re likely to be pleasantly surprised.

From its recent low of 11,740 on March 10 -- when the financial system looked like it really might implode -- the Dow is up 9.4%. The gains are similar or better for broader U.S. indexes and many foreign stock indexes.

On the flip side, look what’s happening with U.S. Treasury bond yields: They’re up sharply in recent weeks. Bond yields rise when investors are bailing out of the securities. Wall Street is dumping Treasuries because fear is receding. Many investors no longer feel the need to hide in the relative safety of government debt.

The "panic bid" for Treasuries is going away, says Tom Tucci, head of government-debt trading at RBC Capital Markets in New York.

The best explanation for the markets’ turnabout is the simplest one: the world didn’t end. After the near-collapse of brokerage Bear Stearns Cos. last month, the Federal Reserve took a gamble and opened its lending window wider not just to banks, but to securities firms.

"The Fed has added liquidity to the financial system in amounts never seen before in history," says Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co. in Nashville.

The Fed didn’t end the housing crisis, and it may not have forestalled a recession. But it bought more time for the financial system to deal with the mountain of bad mortgage debt that’s still out there.

And now that fear of immediate cataclysm has evaporated, investors have had a chance to reconsider what they should be doing with their money. With better-than-expected first-quarter earnings reports this week from IBM Corp., Google Inc., Caterpillar Inc. and others, it’s not a big surprise that stocks are getting another look.

"The market is all about sentiment and perception," says Marc Pado, U.S. market strategist at brokerage Cantor Fitzgerald.

The sentiment and perception right now is that the future isn’t as scary as it appeared a month ago. Sometimes, that’s all it takes to get people interested in taking some risks again.

Posted April 18, 2008

Comments

[Jeremy S.]

Or maybe Markets don't move down in a straight line? What has really changed? You sound so naive that you can't possibly believe what you are spewing. Can you say suckers rally? You should be in real estate, of course you'll need to wait out the coming crisis in Alt-A loans (where all the expensive liar lones dwell), the continued devastation of the subprime market, the pending demise and nationalization of Freddie and Fanny, the no end in sight depreciation in value of all homes Nationwide, the thawing of the continued frozen credit markets, the eventual collapse of credit derivatives market. But the wait for all those issues to work through the real estate market may be shorter than the wait for the equities markets to straighten out the imminent collapse of U.S. corporate earnings, ever swelling corporate and individual bankruptcies, joblessness, the failed bond auction loan sector, the stalled junk bond market, the continued massive financial writedowns, oil going ever higher ("Peak Oil"), soaring commodity prices, rampant inflation in some areas (food, commodities), deflation in others (homes, wages) . But hey we had a suckers rally on Friday based off of horrible (and still disengenous) news from another mammoth failing financial insitution so maybe "the future isn’t as scary as it appeared a month ago" (maybe it's a lot scarier?).

[Steve Consilvio]

The stock market is an institutionalized ponzi scheme. There is no way that somebody can give you more money than you gave them, unless they first take it from someone else.

Either way you lose: higher prices for the goods you buy, lower wages for the job you do. Somebody has to pay the broker, his rent, for his equipment, and his staff, etc., to do nothing productive all day.

Wall Street is in many ways a shadow/reflection of the government's waste.

All these people are doing is making the numbers grow, which makes everyone poorer as a result. Including our columnist Tom, regrettably, who fails to report on what is really going on.

[buz]

I am not buying it. Been around long enough to not go for the head fake. 70% of our economy is based on consumer spending which is taking a NOSE DIVE. As the consumer goes, so goes the economy. People are not going to splurge on unnecessary junk when they are nauseous from spending $80 filling their gas tank.

[Fred]

A classic dead cat bounce.

Wait a little while, and the market will be heading back down even faster than before.

[butterflysoup]

Could this have been written under the influence of Sam Zell? Mr. Petruno is generally sensible. That said, there are select securities that might be worth purchasing now and holding for 10 years or so.

[JayCeezy]

The ignorance in the previous three comments is breathtaking. The stock market is not doomed to decline, not a 'ponzi scheme', and not dependent on a household paying $80/week instead of $40/week for gas.

The stock market is not a zero-sum instrument. It is a forward-looking measure of the value created by companies and the work of their employees. IBM earnings translate to more capital expenditures translate to investment for increased production rates, translate to more earnings.

Tom Petruno is an insightful writer, and I have admired his explanation and analysis for years. He is not a mindless cheerleader, and he does not retype press releases (the LA Times has plenty of those kind of writers). This article is a sensible snapshot; next week may change as circumstances warrant. In the meantime, this is great.

[Gimme a Break]

We ALL expected MORE of you Petruno...you looking for a position with the Bush cabal? Maybe mouthpiece for Bernie? Wail Street (no sp mistake) has a great need for those who blow smoke up our proverbials, and find imaginative ways to obfuscate. Your next mantra..."It's different THIS time."

[Marvin McConoughey]

I may be the only person in the world who is ignorant about the stock market's direction. It is the truth! I don't know what the market will do. Not tomorrow, not for this year, and not for ten years. In the face of those who would grace me with their ineffable wisdom, I mention these few samples of doubt. How fast will global energy reserves be depleted? Can China maintain its economic momentum? What new energy inventions are about to proclaimed? Can America maintain its status as a preferred currency provider? How much can we economize on energy consumption without harming the economy? Is America's psychological confidence on the upswing, downswing, or neither?

I appreciate most of the advice. Now, please, tell me how to distinguish that which is accurate from that which is not.

[Louis Cabeza]

Hmmm. I really want to believe it's true but.... but hasn't the government really just put off the day of reckoning with yet another large injection of money? Or, possibly shifted the reckoning to inflation further down the road?

This is a little too neat and a little too quick to call this meltdown even close to resolved. What did I hear on NPR the other day? Homebuyers who were really put out because their bank wanted a 10% downpayment in a declining market. I don't think that anyone has really learned anything from this "scare" and that this is an interlude to the larger resolution.

[Rick]

Economic statistics are lagging indicators. The stock market is a leading indicator. Markets will typically begin rising about 60% of the way through a recession, looking forward to the end and the light at the end of the tunnel. Those who ignore that stat will be continually holding the bag at the wrong time, wondering why the world is out to get them. Like the earlier posters in this thread.